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Northwest Electric Company's (NEC) capital structure comprises of debt and common equity only in the proportion of 0.40 and 0.60 respectively. Cost of debt of NEC is 12% and the company is in 30% tax bracket. The last dividend paid by NEC was $2 and next expected dividend is $2.20. It is assumed that NEC's dividend grows at constant rate. The current market price of its common stock is $50. NEC has two projects available: project X has a rate of return of 10.50%, while Project Y's return is 13%. These two projects are equally risky and about as risky as the firm's existing assets. (a) What is NEC's cost of common equity? (b) What is WACC? (c) Which project NEC should accept? Why? (You must show all necessary workings, a single numerical value will not be accepted)
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